Over the past 9 years, $20.6 billion has been invested into Insurtech start-ups (data below as of March 21st from Coverager).  

In 2016 & 2017 alone, this figure amounts to $10.7b.

I love it.  There is nothing better than reading about a newly funded start-up from a large VC firm.  

It takes a ton of blood, sweat and tears to get an investment from a high-profile VC and it is extremely rewarding for the start-up that is able to secure funds from one.  

These transactions tend to generate a lot of press (as they should).  It allows the start-up to say ‘we have proven ourselves by gaining some traction, have passed the intense due diligence of a VC firm and now have the runway to serve you.’  ‘You’ in this sense typically means a carrier (in the case of a B2B Insurtech start-up).

There is another group of start-ups out there that do not get any funding press for the reason of, being self-funded.  

Because this group of start-ups do not generate press from a recent funding round from a high-profile VC firm, they sometimes fall under the radar of carrier innovation teams that are scanning the market for meaningful solutions.  

This article is NOT to take away from the funded companies.  The majority of start-ups I work with are well funded VC start-ups.    

This article IS to educate on what a self-funded (i.e. bootstrapped) start-up is, some advantages and challenges of working with one as well as how a carrier should assess a bootstrapped start-up vs. a VC funded one into their decision making criteria.  

To help with this, I had the pleasure of interviewing Nick Mair, CEO and Co-Founder Atticus DQPro.  Atticus DQPro is a data monitoring platform designed specifically for the operational and regulatory needs of the Insurance market.  Atticus DQ Pro was bootstrapped from Nick’s first business, Atticus Associates, a consulting service to the London and specialty Insurance market.  

What is a bootstrapped start-up?

According to Investopedia, bootstrap is ‘a situation in which an entrepreneur starts a company with little capital. An individual is said to be bootstrapping when he or she attempts to found and build a company from personal finances or from the operating revenues of the new company.’

Nick’s definition was simply that a bootstrapped tech start-up is ‘a self-funded software business’.   This self-funding can either come from a founders personal finances or another revenue stream, such as consulting.  A third approach is to fund a company based on the revenue from a product that you are building, though this can be harder to get off the ground.  

There are also circumstances whereby a company will bootstrap for a period of time in order to obtain more attractive fundraising terms (more on this later).

For Atticus DQPro, Nick had an established consulting business in the UK Insurance market. Their focus was on technological implementation and transformational change for carriers.

By gaining on-the-ground understanding of how carriers work and what their problems were, Nick and his team were able to identify a solution for the specific need their clients were facing.  

They got the idea and the funding from their consulting business.   

What are some of the advantages to working with a bootstrapped Insurtech start-up?

‘When you are bootstrapping, you are living on very limited amount of cash and this means you are forced to solve a problem faster than a VC funded outfit.’  

I found Nick’s statement above to be quite interesting.  Whether a start-up is bootstrapped or VC funded, they must have a solution that is relevant to the carriers they are trying to work with.

For those that have VC funding, their runway may be a bit longer.  VCs are typically looking for a total return/liquidity event 5-7 years from time of investment and good traction within 1-3 years.  

Bootstrappers do not have this same luxury.  ‘Many bootstrappers are looking to solve a real problem now rather than something truly disruptive’, Nick mentioned.

Nick explained that from his experience that means getting to product/market fit and real revenues faster.  If they don’t (unless they very deep pockets), then they could be out of business in less than a year.

Because of this, Nick said that this really pushes the bootstrapper to solve problems faster with the carriers they work with and then scale to quickly after that.  

Following from this, we discussed a very important point that bootstrappers are able to mine opportunities that are not of interest to VCs because they’re sub-scale e.g ‘it’s a $5m to $30m opportunity rather than $100m+.’  ‘That leaves a lot of niche ‘problem opportunity’ for bootstrappers to fix without competition from funded start-ups….We can argue revolutionary change is required for our industry but evolution can happen in parallel to solve real business problems now.’

Lastly is the area of domain expertise.  Many bootstrappers (as in the case with Nick) are industry specialists who have found a need within the domain and want to fix it.  

Many of the VC funded start-ups come with founders with deep technology backgrounds. They have built great solutions that they then believe can either enhance and/or disrupt Insurance, yet lack the Insurance industry domain expertise.  

I will note that I do see this dynamic shifting and there are many more VC funded start-ups with founders that come from within the Insurance industry.  

What are some of the challenges to working with a bootstrapped Insurtech start-up?

The above advantages are not to say that all VC funded start-ups are looking for long-term disruptive solutions.  Many of the start-ups we are seeing funded today have product/market fit solutions that solve the existing problems of today’s insurers.  

These VC funded start-ups have the ability to scale their teams (specifically in sales/business development) much more quickly than a bootstrapped model allows.  Nick shared that this problem typically comes when the bootstrapper has around 10 clients and need more resources to continue to market and deliver their product.  This is typically the time that a bootstrapper needs to make a call on securing outside funding or not.

Nick’s view is that bootstrappers that can generate a decent annual recurring revenue (of roughly $1-2m) will be in a better position to get additional funding on more favorable terms (i.e. the start-up already knows they have something that works and can be more confident when/if seeking additional funding to scale, either through a VC, small private equity firm or from a carrier).  

Many bootstrappers may be comfortable with the business they have and others have bootstrapped for the specific reason of getting better terms when seeking outside funding.

Getting to that point and knowing when to make that call be hard for a bootstrapper.

That is another disadvantage of working with one. It’s primarily their own management team and their Advisory Board.  

Having a VC funded start-up brings the experience of the firm that invested in them to their team.  A VC firm has massive skin in the game for their start-ups succeed.

If they are a reputable VC firm, they have dealt with start-ups for a long time and likely had some good exits.  They will be able to bring a different perspective that the founders may not have.  This is something that the bootstrapper may or may not have access to within their own management team/Advisory Board. 

What does this mean for carriers?  Should they partner with a bootstrapped Insurtech start-up or a VC funded one?

A few months ago, I wrote An Insurance carrier’s guide to working with an Insurtech start-up.  The first point is to ‘Understand and prioritize your organization’s needs’.  

I would like to reiterate this.   A carrier must have a problem/area that needs to be addressed.  If the start-up fills this need, then move to the next, which is due diligence.  

If the start-up is VC funded, this is a good first step.  

VCs have ridiculous due diligence processes (just ask any founder what the process is like).  If a start-up has secured a Series A or higher from a reputable VC firm, then they have passed a certain test.  

The VC will have looked at their business plan, legal entity set-up and founding team to the nth degree (amongst other things) before investing in them.  A carrier must perform their own due diligence as well and with a VC funded one, they can have the assurance that someone else has also done a fair amount of it already.  

For a bootstrapped one, it is important to know where there funding is coming from and what sort of runway they have.  

For both, it is important to know what sort of engagements they have done.  If they are only in pilot stage with the carriers they are working with, this is OK.  Ask what sort of results they can share with you from the pilots they have done/are doing to indicate whether that is the sort of result you are looking for.  

Additionally, when looking at the team of the start-up, it is extremely valuable if some of the founders/team members have actual Insurance industry experience.  This will add a another element of understanding of the carrier’s business throughout the engagement of working together.

Lastly, it is suggested that carriers start with a pilot when working with a start-up (whether they are funded or bootstrapped).   This is a good way to validate the work they say they are going to do with you before going fully commercial.

Summary

There are tons of start-ups out there.  It’s such an exciting time to be in this business and to be working with such smart and energetic people/founders that are trying to make Insurance better for consumers.  

I have deep admiration and respect for all start-ups, whether they are funded by VCs or bootstrapped.  It takes a lot of courage and perseverance to start a business, especially in one as highly regulated as ours is.  

There are many reasons why a start-up would be bootstrapped vs. raising funds.  

The last point Nick made to me was ‘self funded can mean bootstrapped by design/choice rather than trying to get funded. Founder reasons can be keeping control, better work/life balance or greater freedom.’  

For those thinking about starting an Insurtech start-up, have a look at this article which Nick shared with me.

And for those carriers looking to partner with a start-up, do your due diligence and make sure you are filling a needs to be solved and putting the carrier in a better place as a result.  VC funded start-ups and bootstrapped ones are both good options and you should consider both for your innovation efforts.  

I’m interested in hearing about more bootstrapped success stories. Through Coverager one can see the other self-funded start-ups out there.  Please reach out to me at stephen at pivot dot asia or comment on the Fintech Genome for further discussion.

Stephen Goldstein is an experienced Insurance executive and Insurtech dealmaker with a core focus on growing revenue, launching go to market initiatives and advising industry leaders.

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.